Free kick from the taxman

The taxman has given businesses a bit longer to lodge their FBT returns. There are also some crucial FBT changes that you need to understand. By TERRY HAYES

By Terry Hayes

The taxman has given businesses a bit longer to lodge their FBT returns. There are also some crucial FBT changes that you need to understand.

Fringe benefits tax (FBT) returns are part of the ongoing compliance burden faced by many SMEs. But there is a little good news in store.

The tax office has been experiencing delays with processing FBT returns and deferral requests for the lodgement of 2008 FBT returns (those covering the period 1 April 2007 to 31 March 2008). So that no one is disadvantaged, the tax office has told tax agents (who lodge almost all FBT returns for businesses) that the Commissioner has granted a general deferral for the lodgement of 2008 FBT returns until 25 June 2008.

The due date for final FBT payments – due when an FBT return is lodged – is also deferred until 25 June 2008.

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Meal cards and work-related items

In other important developments, a bill has been introduced in Federal Parliament to implement some of the Government’s 2008 budget announcements concerning FBT exemptions. The bill is the Tax Laws Amendment (Budget Measures) Bill 2008.

The bill ensures that food or drink provided as part of a salary sacrifice arrangement (such as meal card arrangements) are not exempt from FBT. With a meal card, an employer pays for employee meals provided by a third party located on, or delivering to, the employer’s premises. An employee can salary sacrifice a meal card to purchase lunch, coffee and other consumption items out of their pre-tax income.

The existing exemption applies to property consumed on the employer’s premises on a working day.

The amendments will exclude meals from the FBT exemption where they are provided as part of a salary sacrifice arrangement. The Government considers this will restore the intended policy and will improve equity in the treatment of employee remuneration.

Specifically, under the changes, the FBT law will be amended so that there will not be an FBT exemption for food or drink provided to an employee where:

An employee has agreed to receive the food or drink in return for a reduction in his or her entitlement to receive salary or wages and this would not have happened apart from the agreement.

It is reasonable to conclude that the employee’s salary or wages would be greater if the food or drink were not provided as part of the employee’s remuneration package.

For these purposes, salary sacrifice arrangements include “meal card” arrangements whereby an employee forgoes salary and wages to have food and drink supplied to them on their employer’s premises. However, it does not apply to a subsidised canteen which is available to all employees and which does not form part of a salary sacrifice arrangement.

Example

To highlight why it is making the changes, the Government gave the following example.

As an employee, Paul’s income is subject to the top rate of taxation. There is a restaurant on the ground floor of Paul’s employer’s premises. His employer has entered into an arrangement whereby the restaurant provides employees with a “swipe card” (meal card) to purchase meals.

Paul’s employer offers a salary sacrifice arrangement to its employees to acquire a meal card. Paul enters into a salary sacrifice arrangement for $3000 with his employer to obtain a meal card. Paul orders his lunch each day (and occasionally dinner) and the restaurant delivers this to his office.

The provision of lunch consumed in Paul’s office is exempt from FBT, so Paul’s employer has no FBT liability on the provision of the benefit. Paul has reduced his tax by $1350 (because of the $3000 salary sacrifice arrangement).

Karen, who works in the building across the street, earns the same income as Paul. Karen’s employer, however, does not offer these arrangements. Karen pays $1350 more tax than Paul and has to buy her own lunch.

Eligible work-related items

The bill also tightens the FBT laws to ensure that the FBT exemption for eligible work-related items is restricted to items that are used primarily for work-related purposes. Before this change, with the exception of mobile phones, computer software and protective clothing, there was no requirement that these items be used for work purposes in order to be FBT exempt.

Since the exemption was introduced back in 1995, changes in technology have increased access to portable electronic items such as laptop computers. Employees are able to acquire these items under a salary sacrifice arrangement and use them for private purposes.

This allows them to acquire goods for private use out of pre-tax income. In justifying the proposed changes to the law, the Government said this is inconsistent with the original policy intention that the exemption should only be available where personal use of a particular item is merely incidental to business use.

Specifically, the amendments will ensure that the following eligible work-related items will be exempt from FBT where they are primarily for use in the employee’s employment – a portable electronic device; an item of computer software; an item of protective clothing; a briefcase; and a tool of trade.

In addition, the exemption will be limited to one of each of the listed eligible work-related items per employee per FBT year – unless it is a replacement item. Currently, except for laptops or other portable computers, there is no restriction on the number of items for which the exemption can apply in an FBT year.

The restriction on the exemption for these items will apply to items that have a substantially identical function. Note that the list of eligible work-related items will be updated for technological changes so that it covers, for example, work-related portable electronic devices.

Date of effect

It is very important to note the date of effect of these changes, even though the bill is still before Parliament and will not be debated in the Senate until after it resumes on 16 June 2008.

The amendment made in relation to the meal card arrangements applies to food and drink provided after 7.30pm eastern standard time on 13 May 2008. However, if an employee has entered into an agreement with their employer before then, any food or drink that relates to an existing balance at that time will not be subject to FBT if the food and drink is provided before 1 April 2009. Any food or drink purchased with additional credits (“top-ups”) that occur after 13 May 2008, however, will be subject to FBT.

The amendment made in relation to the exemption for eligible work-related items applies to eligible work-related items acquired after the same time and date, other than items acquired under a contract entered into at or before that time. To avoid doubt, this applies to items substantially identical in function and replacement items.

Terry Hayes is the senior tax writer at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions.